Tariffs, Trade, and National Security: The U.S.-China Trade War in Context
October 15, 2018
Bush’s 2002 Steel Tariffs
To understand the current situation, it is helpful to consider the history of US tariff disputes. In March 2002, the Bush administration imposed an average 30% tariff on imported steel. The administration asserted that such a tariff was necessary to protect the US steel industry from cheap foreign steel imports. Later the administration revealed that Bush’s motivation were primarily political, seeking to benefit Bush supporters in steel producing states such as Pennsylvania, Ohio, and West Virginia. Regardless of intention, the tariff’s results were underwhelming in their targeted populations and painful everywhere else. The increased cost of steel inflicted a brutal blow to businesses that relied on steel. In addition, due to the massive imbalance in the number of people in steel-using industries compared to steel-producing industries, the cost to the economy was immense. One analysis found that the higher prices cost the US economy nearly 200,000 jobs; a figure exceeding the number of people that were employed in the entire US steel industry. Furthermore, over $4 billion in wages were lost at smaller steel manufacturers. The US International Trade Commission found an economy wide welfare loss of $41.6 million and a GDP loss of $30.4 million. While a handful of jobs in the steel industry were helped by the tariffs, many questioned the wisdom of such a policy “at an annual cost of $2 billion to the steel users-or $584,000 per job saved”.
The response from the international community was quick and hostile. Several key US allies from Japan to the European Union (EU) expressed their contempt for the policy and threatened to implement their own tariffs on US products. In addition, the EU filed a complaint against the United States to the World Trade Organization (WTO). The EU alleged that the tariffs violated the terms of trade the US had agreed to upon joining the organization. Against US protests, the case proceeded and in November 2003 the WTO not only found the Bush administration’s tariffs illegal but that affected nations could place trade restrictions of up to $2.2 billion on US exports. While initially defiant, the administration eventually backed down and Bush removed the tariffs after just 18 months. By most metrics, the tariffs were a failure. Alternative legislative approaches such as direct subsidies, tax credits, or assistance would have been more effective at providing relief while avoiding international disdain.
Obama’s 2009 Tire Tariffs
As another piece of the historical US tariff narrative, following recommendations from the US International Trade Commission Obama increased tariffs on Chinese tire imports. The administration’s rationale was that Chinese tire dumping was making it difficult for US firms to compete. Thus raising tariffs to 35% was thought to protect the US tire market. But as a result, prices for tires rose upwards of 28% in some parts of the country and these increased costs were passed directly onto consumers through more expensive vehicles. The tariffs also failed to bring back jobs from other countries by cutting imports. Rather, US tire imports from all other countries except for China rose dramatically. It is difficult to say whether the tire tariffs had any meaningful benefits, for either American consumers or tire manufacturers. The Peterson Institute for International Economics had harsher words writing in a policy report, “In retrospect, tire safe-guards did not change Chinese policies in a helpful way, nor did they boost US employment. The best thing about the tire tariffs is that they expire in September .”
New Tariffs, New Challenges
While the precedent of previous trade conflicts is already dire, the Trump administration’s steel and aluminum tariffs are different from their predecessors. President Bush’s tariffs on imported steel were imposed under Section 201 of the Trade Act of 1974. Section 201 tariffs, also known as “safeguards” can be invoked when a surge of imports threatens to injure a domestic industry. These tariffs are temporary, meant only to help recover after specific serious economic injuries, and are not targeted against any specific country. Obama acted pursuant to Section 421 of the same trade act. Section 421 tariffs are meant to act against “market disruption” by enabling the President to use temporary safeguard tariffs, identical to those used by Bush, targeted specifically at China.
In contrast, Trump’s steel and aluminum tariffs were implemented under Section 232 of the Trade Expansion Act of 1962. Section 232 authorizes the U.S. Commerce Department to investigate and report whether imports of a particular item pose a threat to “national security” and have the President propose whichever remedy he sees fit. The Department finished their report in 2018 and encouraged the President to apply broad tariffs. This is problematic both at home and abroad. Domestically, Trump’s rationale for the tariffs is unclear. Regarding security, Defense Secretary James Mattis wrote in a letter to Commerce Secretary Wilbur Ross that the Department of Defense, “does not believe that the findings in the [Section 232 report] impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.” Mattis further expressed concern regarding the negative impact of the report’s recommended policies on our key allies. Foreign steel imports primarily originate from US allies, with China only accounting for 2% of US steel imports compared to 20% for Canada, 13% for Brazil, 11% for South Korea, and more.
(Source: International Trade Administration)
Economically, higher prices for steel and aluminum will hurt the many industries that use those metals, thereby costing jobs and increasing prices for consumers. Collectively, the various industries impacted by these tariffs — automakers, energy companies, construction, aircraft manufacturers— employ far more people than steel and aluminum producers. Trump’s measures will cost thousands of jobs according to numerous manufacturing groups. Several state economies, such as Louisiana, Missouri, Connecticut, and Maryland are expected to be especially hurt by the tariffs due to their reliance on steel and aluminum imports as well. This is also all without considering foreign consequences. US allies have all threatened to reciprocate with protectionist measures of their own. Harley-Davidson, a US motorcycle manufacturer, recently announced plans to move production overseas because of retaliatory EU tariffs. Chinese retaliation has already taken its toll. With $2.4 billion in new tariffs on 128 US products including everything from aluminum to pork, of which China is the largest global consumer, life will become more difficult for citizens in rural states such as Iowa, Indiana, and North Carolina that voted for Trump.
(Source: Peterson Institute for International Economics)
Internationally the move has been met with wide condemnation. Several states have launched complaints with the WTO. In response, the Trump Administration has threatened to invoke Article XXI of the General Agreement on Tariffs and Trade (GATT), the treaty basis of the WTO. Article XXI allows for an exemption to traditional WTO rules for reasons of “national security.” The clause, which has been used only a handful of times in the GATT’s history, is primarily self-judging, meaning the WTO Dispute Settlement Body gives wide leeway to states in determining what constitutes a security interest. If Trump presses forward with, as discussed earlier, a weak national security basis, the administration will normalize the exception and invite all countries to begin making their own determinations regarding what international economic activity threatens security interests. US adversaries, such as Beijing, could further increase their discriminatory trade practices and block US investment. China could even further enshrine their practice of exploiting US companies for sensitive technology and intellectual property for Chinese counterparts by justifying the policy as concerning national security.
The global economy has changed significantly since the early 20th century. Despite these changes, the lessons from the Great Depression and Smoot-Hawley still ring true. In an interconnected world economy, restrictions on free exchange and commerce hurt everyone. However, current trade practices echoes flawed policies taken by earlier administrations and promise similar consequences. Understanding the history of some of our most recent trade disputes will be invaluable to policy makers moving forward in order to mitigate the damage. Furthermore, by using Article XXI, the Trump administration opens the door for future retaliation from other nations under the national security exemption. If the administration is determined to go forward with this course of action, it should offer exemptions to US allies from tariffs and re-evaluate its legal basis for the regulations. Without proper targeting or legal standing, the ramifications from the administration’s trade policy will be far-reaching and painful for American consumers and businesses alike.
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